First phase of HS2 set to bust budget by ‘many billions’ of pounds

The first stage of the UK’s new HS2 high-speed railway is running “many billions” of pounds over its £40.3bn budget and the Treasury has asked for further potential cuts to the project, according to an internal review.

Europe’s biggest infrastructure scheme has already more than tripled in price since it was approved a decade ago. Since construction started on the first phase of the line between London and Birmingham in 2020 the cost looks set to increase further, according to a report presented to HS2’s board by Jon Thompson, former head of HM Revenue & Customs, who became deputy chair of the project in April last year.

The review said it was “very unlikely” that the £40.3bn price tag for the London to Birmingham section would be met. Although the first phase allowed for a contingency that would stretch the budget to £44.6bn, the report concluded there was only a 50 per cent chance that would be enough.

The final cost was likely to be “many billions more than the reported estimate”, the document, dated June 22 2022 and seen by the Financial Times, warned. It also criticised HS2’s decision to continue to record costs in 2019 prices as this meant none of the figures reflected “what has been or is being paid”.

It added: “In almost every area reviewed significant developments are planned in 2022/23 which impact on the estimates and risk.” Rising inflation was also proving a “significant and growing challenge”.

In a sign that HS2 was struggling to maintain control over costs, the project faced “bids for money from contractors on a continual basis and significant and lengthy commercial discussions around them”.

The Treasury has asked management to identify potential cuts or “scope reductions” to the full project, according to the document. But it warned that shrinking HS2 further would hurt its “value for money” case.

The original plan to build a Y-shaped line between London, Manchester and Leeds via Birmingham was costed at £33bn a decade ago. Last year, Boris Johnson’s government announced it was axing most of the eastern leg to Leeds in a bid to find cost savings as the total budget for the project looked set to exceed £100bn.

Any further cuts would probably include cutting or delaying elements of the second phase of the project, which is meant to run north of Birmingham to Manchester via Crewe.

The review also highlighted shortcomings in the way the first phase was being managed. It said two of the four consortiums hired to oversee the engineering work did not have “sufficient capacity and capability to manage all the various obligations placed up on them”. In hindsight, the consortiums were “too large to effectively manage and control”, it added.

The first phase of the project is already running at least three years late, with trains not expected to run between the capital and Birmingham until 2031.

The threat of further HS2 cost overruns will add to the pressure on prime minister Liz Truss. In July, then cabinet officer minister Kit Malthouse warned that HS2 was a “killer whale” that could “rip the arm” off the next prime minister.

More than £4bn of improvements to other parts of the UK’s railway system have already been axed because of a governmental decision to focus spending on the high-speed railway line.

The government said it remained “committed to delivering [HS2] on time and to budget”, adding: “As with all projects of this scale, contracts and scope are routinely considered to ensure they continue to deliver the value for money for taxpayers.”